IN DEFENCE OF THE NORTH AMERICANROLLING CHARGE

Sarah Lowrie* & Paul Todd**

In Barlow Clowes v. Vaughan, 1 the Court of Appeal reluctantly accepted thatthe rule in Clayton's case 2 remained generally applicable to competing claimsin equity, to mixed funds in running bank accounts. This first-in first-out ruleoperates rather like a bus queue, attributing successive payments out of anaccount to the earliest payment in. The effect of this is that if money isdissipated from the account, Clayton's case benefits later payments in, whereasif money from the account is committed to an investment which increases invalue, the rule benefits earlier payments in. In both cases, a great deal can turncapriciously on the chance order of payments. It is perhaps not surprising,therefore, that neither in Barlow Clowes, nor indeed in any other case, has therule been wholeheartedly embraced. Indeed, in Barlow Clowes itself, there wasa strong entreaty to the House of Lords to reconsider the rule. 3

The purpose of this article is to advance suggestions as to how the law shouldrationally develop, if ever the House should have this opportunity. It will besuggested that the North American Rolling Charge, which has not generally

• University College, Swansea.

•• Cardiff Law School.

1 [1992] 4 All E.R. 22, [1992] B.C.L.C. 910.

2 (1816) 1 Mer. 572, [1814-23] All E.R. Rep.!, 35 E.R. 781.

3 Supra.n.1 per WoolfL.J. at 39a: " ...short of the House of Lords, it is settled law thatthe rule in Clayton's Case can be applied to determine the extent to which, as between each other,equally innocent claimants are entitled in equity to moneys which have been paid into a bankaccount and then subject to the movements within that account." This is an unenthusiasticstatement ofWoolfL.J.'s view of the existing law. Nor is Leggatt L.J.'s acceptance of theapplication of Clayton's case overwhelming at 43b: "During the 175 years since the rule inClayton's Case was devised neither its acclaim nor its application has been universal."

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been greeted with enthusiasm by courts in the United Kingdom, 4 should have asignificant role to play. Even in the absence of reconsideration of Clayton'scase by the House, the extent to which, if at all, present authorities constrainsuch suggestions, will be questioned.

For the purposes of this discussion, it will be assumed that the equitiesbetween each claim are equal. 5 The existence of an initial fiduciaryrelationship, allowing tracing in equity, will be assumed. 6 There seems littledoubt that courts in the United Kingdom lean towards a pari passu approach todistribution,7 and there are circumstances where this is the fairest approach. Forexample, suppose a trustee pays £100 of Alpha's money and £200 of Beta'sinto a mixed fund and then dissipates £150, leaving £150 in the account. It is

4 However, in Barlow Clowes, Leggatt L.J. observed at supra.n.1 at 44c: "As betweenbeneficiaries to whom money in an account belongs, they should share loss in proportion to theirinterest in the account immediately before each withdrawal. The fairness of that course isobvious. It is exemplified by the judgment of the court in Re Ontario Securities Commission v.Greymac Credit Corp.(1986) 55 O.R. (2d) 673. But if, as here, that calculation is too difficultor expensive, the beneficiaries should in my judgment share rateably." This is a clearendorsement of the rolling charge in any case where calculation is not too difficult or expensive.

5 In other words, excluding the situation in cases such as Re Hallet's Estate (1880) 13Ch.D. 696, where the mixing was done by a trustee. Re Diplock [1949] Ch. 465 is authority thatRe Hallett's Estate does not apply where funds are mixed with those of a volunteer. InWestdeutsche Landesbank Girozentrale v. Islington L.B.c. [1996] 2 All E.R. 961 at 987, LordBrowne-Wilkinson's reductio ad absurdum involving T, RI and R2, depends on Re Hallett'sEstate applying to R2, who is a volunteer, but this in tum depends on the bank's argument beingcorrect, a proposition which all their Lordships rejected, although a minority would have heldin the bank's favour on another issue.

6 A requirement restated by Lord Browne-Wilkinson in Westdeutsche ibid. at 996e.

7 The House of Lords had to strain to reach this result in Sinclair v. Brougham [1914]A.C. 398 where the shareholders and depositors could be regarded as equally innocent or equallyguilty: e.g. at 451-452 per Lord Sumner, who observed that although few if any suspected thatthe banking business was ultra vires, all had notice of the rules, and so ought to have known.Either way, the equities between them were equal. See also Barlow Clowes supra. n.1 and ReDiplock's Estate supra.n.5, except for the claims involving Dr.Bamardo's Homes and theNational Institute for the Deaf, where Clayton's case was applied: see infra.n.17 & text alsosupra.n.5 at 551-554, and in the case of the National Institute forthe Deaf [1948] 2 All E.R. 429.Though Sinclair v. Brougham was overruled in Westdeutsche supra.n.5 at 996f, this was on thegrounds that equitable tracing ought not to have been possible at all, rather than on the principlesof pari passu distribution.

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difficult to argue that any result is fairer than pari passu distribution, giving£50 to Alpha and £100 to Beta. It would certainly be difficult to argue that afairer solution would depend on the order in which the moneys were deposited.By contrast, an application of the rule in Clayton's case would benefit the laterdepositor: if Alpha's money were deposited first, Alpha would obtain nothing,whereas if Beta's money were deposited first, Beta would obtain only £50 butAlpha would lose nothing. So here, pari passu clearly leads to a fairerdistribution than Clayton's case.

However, it by no means follows that pari passu necessarily achieves a fairerresult. Suppose that the above example is varied, in that for some time prior topaying Beta's £200 into the mixed account, the trustee has been using theaccount for depositing payments from Alpha, and that a total of £400 ofAlpha's has been paid into the account at some time. However, over the sameperiod the trustee has dissipated some of the money, so that only £100 remains.Then Beta's £200 is paid in, and as before, a further £150 dissipated, leaving£150 in the account. In this case, a pari passu distribution would give theAlpha the benefit of the entirety of the £400, implying that he has contributedtwice as much to the fund as Beta. Thus, Alpha would get £100 and Beta only£50. This seems unfair on Beta, who is now adversely affected by paymentsinto and out of the account prior to the mixing. A similar point is made by LordJustice Dillon in Barlow Clowes, where contrasting Clayton's case with paripassu, he observed that pari passu operates against later investors wheremoney has been dissipated from the account:

"For my part, so far as fairness is concerned, I have difficulty inseeing the fairness to a later investor ... of holding that all thosemoneys must be shared pari passu by all investors early or late ifthere was no common investment fund ... If the application ofClayton's case is unfair to early investors pari passu distributionamong all seems unfair to late investors."g

If, on the other hand, the £300 which had been withdrawn prior to Beta'sdeposit, had been committed to an investment now worth £600, Beta obtains ashare in the investment on pari passu principles, even though there is nomeaningful sense in which his or her money was used. Where money isprofitably invested, rather than dissipated, pari passu tends to benefit the later

B Supra. n.l at 32c.

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investors.By contrast, an application of the rule in Clayton's case would benefit Beta in

the first case, where as before, Alpha would obtain nothing, and benefit Alphain the second. Here, Alpha would get the entirety of the investment, and Betawould only obtain the benefit of the money remaining in the account. Thesesolutions are not obviously any fairer than pari passu, since in neither casedoes Alpha obtain any benefit from what remains in the account, although £100remained prior to Beta's investment. So here, neither pari passu nor Clayton'scase leads to a fair solution.

A third approach, sometimes referred to as the North American RollingCharge, has been met with little enthusiasm by the courts, 9 but could if adoptedresolve both the above problems of the pari passu approach, without leading toany of the unfairness of Clayton's case. Here the case in principle for the NorthAmerican Rolling Charge will be examined along with its limitations, and theauthorities for and against its adoption.

THE WORKING OF THE NORTH AMERICAN ROLLING CHARGE

The North American Rolling Charge was described by Lord Justice Woolf inBarlow Clowes as follows:

"This solution involves treating credits to a bank account made atdifferent times and from different sources as a blend or cocktailwith the result that when a withdrawal is made from the account itis treated as a withdrawal in the same proportions as the differentinterests in the account (here of the investors) bear to each other atthe moment before the withdrawal is made."l0

9 E.g. in Barlow Clowes supra. n.1 at 28a-b, Dillon L.J.(at 33d) said: "The complexitiesof this method would, however, in a case where there are as many depositors as in the presentcase and even with the benefits of modem computer technology be so great, and the cost wouldbe so high, that no one has sought to urge the court to adopt it, and I would reject it asimpracticable in the present case." Woolf L.J. took a similar view at 35j, but also observed thatit is the fairest method in some situations. Dillon L.J. thought it had in any case been ruled outby authority, having been decisively rejected in Re Diplock; Leggatt L.J. took a slightly morefavourable view of the principle.

10 Supra.n.1 at 35h. A functionally similar description can also be found in Dillon L.J.'sjudgment at 27h-28b.

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Applied to the first example above, the North American rolling charge will giveexactly the same result as pari passu. In the second example, where the moneyis dissipated before Beta's money is paid in, it gives the same result as in thefirst example, because all the dissipations are regarded as Alpha's, surely thefairest solution? Where instead of being dissipated, the money is committed tothe investment which has doubled in value, the result is still the same regardingthe bank account, but Alpha also gets the benefit of the totality of theinvestment. This also seems fairest, as Beta has not, in any meaningful sense,contributed to the investment. It is also a fairer solution, in this situation, thanClayton's case, because Alpha's money was not exhausted by the purchase ofthe investment, and it is therefore reasonable that he retains an interest in themoney remaining in the account.

THE CASE IN PRINCIPLE FOR THE NORTH AMERICAN ROLLINGCHARGE

In spite of the reluctance of the courts in the United Kingdom to embrace theNorth American Rolling Charge, it is contended that it has a number ofadvantages, and will normally be the fairest method of distribution. Oneadvantage is that prior property rights are never disturbed by later transactions.Later payments in do not diminish existing interests in the remaining fund, nordo later payments in obtain the advantage of earlier investments. There is alsono distortion of existing beneficial interests in any property purchased fromproceeds from the fund.

Another justification in principle is that once moneys have lost theiridentity by being mixed into an account, the proportions attributable to eachcontributor can be calculated. These proportions should not change if tlleaccount is later diminished, or split into more than one account. This was of theview taken in Scott on Trusts, in a passage quoted in Re Ontario SecuritiesCommission v. Greymac Credit Corporation:

" ... The claimant has an equitable lien upon the mingled fund, andwhen a part of the fund is withdrawn he has an equitable lien onthe part withdrawn and on the part which remains. If tlle partwhich is withdrawn is dissipated so that it can no longer be traced;the claimant still has his equitable lien on the part which remains.So also, as we shall see, if the part which is withdrawn is preservedand the part which remains is subsequently dissipated, the

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claimant has an equitable lien upon the part which is withdrawn. Itis impossible and unnecessary to detennine whether the claimant'smoney is included in the part withdrawn or in the part whichremains. It is impossible to detennine which part is the claimant'smoney, since his money has been so commingled as to lose itsidentity. It is unnecessary to detennine which part is the claimant'smoney, since he is entitled to an equitable lien upon both parts .... It is true that where the part of the fund which is withdrawn isdissipated and the balance is preserved, the claimant is certainlyentitled to payment of his claim out of the balance. The reason isthat his lien on the entire fund undoubtedly includes the balance ofthe fund after a part has been withdrawn .... The only tenable principle is that the claimant can enforce a lienupon any part or the product of any part of the mingled fund."! I

In Re Ontario Securities, the Court of Appeal for Ontario adopted the NorthAmerican Rolling Charge in a claim involving competing interests in a fund. Inessence, this case involved the account of a trustee, (Greymac CreditCorporation)[G.C.c.] in which was deposited funds entrusted to G.c.c. for twobeneficiaries. One beneficiary was a trio of companies, Greymac TrustCompany [G.T.c.], Crown Trust Company [C.T.C.] and Seaway TrustCompany ["the companies"], and the other was Chorny Mortgage InvestorParticipants ["the participants"]. The moneys of these two separatebeneficiaries were mixed by the trustee into his account at G.T.C.

The money first mixed into the G.T.C. account belonged to the companies,and only later did the trustee mix in money belonging to the participants. Therewas also some money of the trustee's own, but on the reasoning in Re Hallett'sEstate,12 at the time when the participants' money was placed in the account, allthe other money in it belonged to the companies. Prior to this, however, therehad been other payments in of companies' money, and withdrawals, so thatmore money belonging to the companies had been paid into the account thanremained at this time.

II Scott on Trusts (3rd.ed., Little Brown, 1967) at pp.3620, 3623 & 3624, quoted in ReOntario Securities Commission v. Greymac Credit Corporation (1986) 55 O.R. (2d.) 673 at682a-b (Ont.C.A.).

12 Supra.n.5 (because all money withdrawn was therefore presumed to belong to thetrustee).

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The first withdrawal made by the trustee was of $4,000,000, which wasplaced into another account (at one of the beneficiary "companies", C.T.C.).This money remained intact. Later, the trustee made several subsequentwithdrawals from the G.T.C. account, the proceeds of which were dissipated.This left just under $400,000 in the original mixed account.

Both beneficiaries, "the companies" and "the participants," each assertedproprietary claims against these two amounts. What the court had to decide washow these funds should be divided between the claimants, and upon whatprinciple this should be done.At first instance, Parker A.C.J.H.C. held that the loss must at first be deemed tobe against the trustee's interest, on Re Hal/ett 's Estate reasoning. 13 This aspectof the decision was not part of the appeal heard in the Supreme Court. Then,Mr.Justice Parker decided that the funds should be divided according to therespective contributions made by, or on behalf the two beneficiaries. Thismeant that approximately 85 per cent of each fund belonged to the companiesand 15per cent to the participants.

The companies appealed from the original decision, claiming essentially thatthey were entitled to the entirety of the larger sum (they conceded that theywere not entitled to any of the smaller sum, but the total on this basis stillworked out better for them). They claimed that the judge was mistaken inbasing the distribution on pro rata principles, when instead, the rule inClayton's case should have been applied. On the "first in, first out" reasoning,the first moneys paid into the trustee's account at G.T.C. were those of thecompanies, and subsequent deposits were those of the participants. Thus, whenthe trustee removed the money from the G.T.C. Trust account, and deposited itwith C.T.C. (i.e. the large undissipated sum), the money concerned mustnecessarily have been that of the companies. At first instance, Mr. Justice wascritical of Clayton's case, but the appellants challenged his decision basingtheir action on both principle and authority.The companies advanced an alternative pari passu argument. Their argument

was that the time from which the calculation of shares should start should beearlier, since more money had originally been deposited by the companies intothe G.T.C. account, and that this also should be taken into account in anydistribution.

The participants insisted that the view of Mr.Justice Parker was correct, butalso advanced alternative arguments, with which the Ontario Court of Appeal

13 51 O.R. (2d) 212.

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was wholly unimpressed, that Clayton's case only applies to dissipations froma mixed fund, not to investments made with money from it, and therefore thatthe rule applied only after the removal of the $4 million to the C.T.C. account.14

The Court of Appeal adopted Mr.Justice Parker's approach, but rejecting thecompanies' argument that the starting point should be earlier, since at theearlier time there was no participants' money in the G.T.C. account, and thattherefore the participants should not be contaminated by anything that hadoccurred at this time:

"The appellants submit that if the equality, that is, pro ratasharing, approach is to be followed, then to do justice more moneyfurnished by the companies to the trustee than the ... balance ofDecember 15, 1982 [when the participants' money was paid in]should be taken into account. ... If the proper approach is equality,then, it is submitted, this fact [earlier payments in by thecompanies] should be taken into account. ... Quite apart from thefact that the question of whether any part of the original [money inthe account prior to December 15, 1982] ... was returned to thecompanies in some form was not inquired into, I do not think thatthis particular argument of the appellants is of assistance to them.We are concerned with the resolution of competing proprietary,not personal, claims. At the time of the mingling of the trust fundsthe companies had $4,683,000 in the account. Regardless of howmuch they had earlier in the account, they cannot say that they hada proprietary interest in any more than the amount in the accountto their credit on and after December 15, 1982."15

Although the words "North American Rolling Charge" do not appear in thejudgments, the case is clearly based upon the concept, and justifies it.

To summarise, the main argument in favour of the North American RollingCharge is that it does not allow later dealings to affect already-establishedproperty rights. However, in Re Ontario Securities, Mr.Justice Parker acceptedthat there might be practical difficulties, in certain circumstances, in adoptingthe rolling charge, in which case he made no observations on the appropriate

14 Supra.n.ll at 68Ih-682a.

15 Ibid. at 687f-688c.

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method of apportionment:

"I express no opinion on the power of the court to make adisposition on some other basis where it is not possible todetermine what proportion the mixed funds bear each to theother."16

The view of the Court of Appeal was that it would not apply Clayton's case atall to the resolution of problems connected with competing beneficialentitlements to a mingled trust fund, where there have been withdrawals fromthe fund.

PRACTICAL OBSERVATIONS ON THE NORTH AMERICANROLLING CHARGE

There are two further points to note about the North American RollingCharge, both of which may explain why it has rarely been argued in tlle UnitedKingdom. First, it will not often be the best option of either party to anydispute. In a case such as Barlow Clowes, for example, a pari passu distributionwould have produced a more favourable outcome than the North AmericanRolling Charge for the early investors. By contrast, the later investors werebetter off arguing Clayton's case than the North American Rolling Charge. Thiswill generally be the position where money is dissipated, whereas the NorthAmerican Rolling Charge tends towards an intermediate result. The oppositeposition obtains where a valuable investment is purchased, where pari passubenefits later investors, and Clayton's case earlier, and again the NOrtllAmerican Rolling Charge adopts a middle position.

For example, suppose a trustee places £10 belonging in equity to Paul into anaccount, then a further £10 belonging to Michael, then dissipates £10, thenplaces in the account a further £20 belonging to Karen. There is therefore, atthis stage, £30 in the account, whereas a total of £40 has been paid in. Paripassu therefore gives everybody three-quarters of their contribution, i.e. £7.50to each of Paul and Michael, and £15 for Karen. It is worth observing thatKaren has lost out because of the withdrawal of £10, a transaction which

16 Quoted in ibid. at 679g.

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occurred before she had paid anything in, and in which she was therefore in nosense involved.

Clayton's case attributes the whole of the £10 dissipated to the first paymentin, so that Paul ends up with nothing in the account, and Michael and Karenrecover the entirety of their contributions. This seems very unfair on Paul,whose equity would seem to be in no way distinguishable from Michael's.

The North American Rolling Charge recognises that Paul's and Michael'sequities are equal, and apportions the £10 dissipated equally to the two of them.Karen is unaffected by the £10 withdrawal, and the distribution is therefore £5to each of Paul and Michael, and £20 to Karen.

In this case, nobody has a clear advantage in claiming under the NorthAmerican Rolling Charge, although Karen obtains the same by this method asshe would under Clayton's case. Paul obtains more under pari passu than underthe North American Rolling Charge, whereas Michael obtains more underClayton's case.

If instead of being dissipated, the £lOis spent on a first edition now worth£50, the total value of the fund plus the investment is now £80, or twice thecontribution of each of the parties. Pari passu therefore gives each twice theircontribution, i.e. £20 for Paul and Michael, and £40 for Karen. This time,Karen has gained the benefit of an investment to which she cannot have madeany meaningful contribution.

Clayton's case attributes the entirety of the investment to Paul, who cantherefore claim its value of £50, and the others obtain exactly their payments in,i.e. £10 for Michael and £20 for Karen. Yet Paul's and Michael's equitieswould again seem to be equal.

The North American Rolling Charge recognises this by attributing theinvestment equally to Paul and Michael, giving each £25 in the investment plusthe £5 each has remaining in the account (i.e. a total value of £30 each). Karenobtains her payment in, of £20, which is fair, because she has not contributed tothe investment.

Once again, it is in neither Paul nor Karen's interests to claim the NorthAmerican Rolling Charge method of distribution. Paul will attempt to argueClayton's case and Karen pari passu. However, it should not be assumed thatthe North American Rolling Charge will never be the preferred method ofdistribution, since clearly Michael should claim it here. Moreover, in theoriginal example, where the investment was purchased with Alpha's money,the North American Rolling Charge would have been his choice method ofdistribution, as indeed it also was for the participators in the Re Ontario

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Securities case. In general, however, it will rarely be the preferred method ofdistribution for any of the parties, which may explain why it has never beenargued in a court in the United Kingdom.

The second observation to make on the North American Rolling Charge isthat it will never be the cheapest method of distribution. To operate a paripassu distribution, the only information that is required is the total of paymentsinto the mixed account, and the total remaining. There is no need to trace theindividual movements within the account, so that where there are a largenumber of transactions, as in Sinclair v. Brougham or Barlow Clowes, paripassu will obviously be the easiest method. Where money from an account isdissipated, the rule in Clayton's case removes from the account all earlierdeposits, so that it is not necessary to know about them, or about the total ofpayments into the mixed account. There are some situations, therefore, wherepari passu is more difficult to operate than Clayton's case. Suppose, forexample, that a trustee has been paying money from various trust funds througha mixed account over a long period. On a pari passu distribution, assuming thefund has remained in credit, every contributor whose account is in credit willhave some claim on the fund. This would require all the account's dealingsover the entire period to be examined, and it is easy to conceive ofcircumstances where this is impracticable. This is a possible justification forapplying Clayton's case to running bank accounts, 17 which has the effect ofdepriving all but the latest depositors of any interest. Clayton's case operatescapriciously, however, and is difficult to justify except to resolve theimpracticality. 18

Where on the other hand, payments from a mixed account are committed to aprofitable investment, Clayton's case can also sometimes operate more simplythan pari passu, because any moneys paid in after the investment was madewill be discounted. Again, therefore, there is no need to enquire into these, orinto the total of payments into the account.

To operate the North American Rolling Charge, unless the account has atsome stage become overdrawn, it is necessary to examine the whole history of

17 E.g. in Re Diplock in respect of the Dr.Bamardo and the National Institute for the Deafaccounts: supra. n.7.

18 The courts appear to adopt Clayton's case only as a last resort, and have shownreluctance to extend its operation beyond running bank accounts; e.g., Barlow Clowes supra.n.lat esp. 28c-e per Dillon L.J.; Re Diplock's Estate supra.n.S (except for the running bank accountsreferred to supra.n.7).

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the account, the amount of every payment in and out, and the order ofpayments. This is always likely to be at least as difficult as either of thealternative methods of distribution, and will often be more difficult.

CASES IN PRINCIPLE WHERE THE APPLICA nON OF THE NORTHAMERICAN ROLLING CHARGE WOULD NOT BE APPROPRIATE

Although the North American Rolling Charge reaches the fairest result inusual circumstances, it depends on the intention of the parties being that laterpayments should not affect earlier established rights. However, where theintention is to share a collective fund, the parties will intend that later paymentsshould affect earlier established rights, and pari passu distribution will accordwith this intention. This is a possible justification for the result in BarlowClowes, 19and will often be a reasonable inference in unincorporatedassociation cases. 20The intention of the parties was also regarded asjustification for departure from the North American Rolling Charge in Ontarioitself:

"Another exception, an obvious and necessary one, which mightoften overlap with the kind of case just referred to, would be thecase where the court finds that the claimants have, either expresslyor by implication, agreed among themselves to a distribution basedotherwise than on a pro rata division following equitable tracingof contributions."21

19 Indeed, this was expressly the basis of Dillon and Leggatt L.JJ.'s reasoning in the case.Woolf L.J.'s reasoning was based more generally on the intention of the parties, but againdepends on the notion of the parties contributing to a common misfortune, so that they would notwant to 'subject what was left of the pool to the vagaries of chance which would follow from thefirst in first out principle' supra.n.1 at 41e-h. The reasoning was directed primarily to a refusalto apply Clayton's case, but it would have been equally apposite in an argument against theapplication of a North American Rolling Charge.

20 It might also justify the pari passu distribution in Sinclair v. Brougham supra.n. 7, atleast as far as the building society investments were concerned. The usual presumption forunincorporated associations is equality, rather than pari passu distribution, Re Hobo.urn AeroComponents Air Raid Distress Fund [1946] Ch.86, affirmed on other grounds [1946] Ch.194,which adopted pari passu, being an exceptional case.

21 Supra.n.ll at 690e.

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Another departure from the North American Rolling Charge (or indeed, any ofthe approaches considered so far) was made by Mr.Justice Millett in El Ajou v.Dollar Land Holdings p.l. c.. 22Here, while it was clear that the plaintiff was theprincipal victim of a complicated fraud, and that the defendant's only moneyappeared to have come from the proceeds of the fraud, the records oftransactions had not been fastidiously kept, the fraudsters presumably beingmotivated to hide their fraud, and frustrate tracing claims. Clearly, it wouldhave been impossible to apply either Clayton's case or the North AmericanRolling Charge, given this paucity of evidence. Possibly, had Mr.Justice Milletthad the benefit of the Barlow Clowes decision, which had not at that time beenreported,23 he would have adopted a pari passu approach. Instead, however, hematched large cheques from the plaintiff into a running account with similar-sized cheques out of it, in order to establish that the defendant had receivedmoney belonging in equity to the plaintiff. 24 This might be justified if thesimilarity between the cheques in and out gave rise to the inference that theplaintiffs money was never truly mixed into the running account.25

Although Mr.Justice Millett held that the money could be traced into thehands of the defendant, he also held that the defendant did not have therequisite knowledge for a knowing receipt claim. His decision in this respectwas reversed by the Court of Appeal, 26who sent it back on quantum. In El Ajouv. Dollar Land Holdings p.l.c. (No.2), Mr.Justice Robert Walker took the viewthat where there are no competing proprietary claims, and all that is desired isto trace the plaintiffs property into the hands of the defendant for the purposesof establishing a knowing receipt claim, it is unnecessary to apportion

22 [1993] 3 All E.R. 717.

23 As Robert Walker 1. observed inEI Ajou v. Dollar LandHoldings p.l.e. (No.2) [1995]2 All E.R. 213 at 222f.

24 E.g. supra.n.22 at 724j-725e, although the matching was not exact. The claim was inknowing receipt, not tracing: see further infra.n.26 & text.

25 Although Millett 1. appears to have proceeded on the assumption that it was: supra.n.22at 724h. But the suggested inference is reasonable, whereas if the money had been truly mixed,then it is difficult, on any known principle, to justify Millett 1.'s method of calculating theamount the defendant had received of money belonging to the plaintiff.

26 [1994] 2 All E.R. 685.

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competing claims at all. 27 His desired result appears to have been to ensure thatthe defendant obtained no benefit from the fraud, although there were otherclaims, apart from the plaintiff's, when it looked unlikely that any of the otherclaimants would sue. However, this distinction between apportioning forproprietary, but not for personal claims, can lead to difficulties in practice.2&Suppose, for example, any of the others, contrary to expectation, had sued.Either the defendant would be liable for more than he had received, or it wouldbe necessary to resolve the problem on an arbitrary first come first served basis.There is also a principled objection to Mr.Justice Robert Walker's approach,which is that although the defendant had apparently received a large amount ofmoney from the proceeds of fraud, not all of it was from a fraud on theplaintiff. If fraud victims, for whatever reason, decide not to sue, then it is aninevitable consequence that the fraudster will keep some of his ill-gotten gains.That is simply the nature of litigation, and is not a consequence that can beavoided. It is therefore contended that an apportionment should have takenplace in EI.Jljou (No.2), on the principles discussed in this article.

In this section, however, two situations where the North American RollingCharge would be inappropriate have been considered, namely where theinvestment is into a common fund, as in Barlow Clowes, and where the moneyis never truly mixed, which is a possible explanation of Mr.Justice Millett'sapproach in El Ajou. In any case where justification from the North AmericanRolling Charge can be made out in principle, the justification is in favour ofpari passu, or an entirely different tracing principle, such as that adopted inEIAjou, rather than Clayton's case. The only justification for adopting the rule inClayton's case is one of administrative workability, especially in the case of arunning bank account, where both pari passu and the North American RollingCharge would be difficult to operate, in the first case because it is difficult to

apportion where there have been many payments into and out of a fund overmany years, and in the second case because for the same reason, it is difficult toapportion payments out.

Therefore administrative workability arguments are considered next.

27 Supra. n.23.

28 It is not sufficient, as Robert Walker 1. does, ibid. at 223c, to justify the result on thebasis that tracing depends on equity's capacity to impose a charge, rather than its actualimposition, because if the other parties had sued it would have been necessary actually todetermine the extent of each charge.

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ADMINISTRATIVE WORKABILITY ARGUMENTS

It is easy to see how, in the case of a long-term active running account, fromwhich money is frequently dispersed, Clayton's case is the easiest test toadminister, because the earliest payments in are simply removed from theequation. It might be thought that in the usual case, the North American RollingCharge will also be easier to administer than pari passu (at least where thereare dissipations) because each withdrawal reduces the number of claimants, sothe earliest depositors will be ruled out just as they are with Clayton's case.This is only actually going to be the case, however, if the earlier dissipationsare such as to reduce some claims to zero, but in principle, both pari passu andthe North American Rolling Charge require the entire history of the bankaccount to be known.

However, pari passu is itself sometimes justified on the grounds that it iseasier than either of the other two methods to administer, 29 and indeed, there areexceptional cases where this will be true. In Barlow Clowes and El Ajou, forexample, the total investment, and the total remaining in fund, were bothknown, but in El Ajou, inadequate records had been kept, and there was aninadequate trail, which would have made either of the other methodsimpossible. In Barlow Clowes there were a large number of transactions, whichwould have made either of the other methods difficult, but not impossible. 30 Itis suggested, however, that neither of these cases represents a good ground fordeparting from the North American Rolling Charge.

In a case such as El Ajou, it would clearly be inappropriate, on public policygrounds, to develop a rule which encouraged fraudsters to keep inadequate (orno) records, or allowed them to benefit from so doing. It was pretty clear in ElAjou that the only money the Canadians had was derived from the fraudsconsidered in the case, so to distribute pari passu would have been to deprivethe fraudsters of any of their gain, whereas this would not have been the casehad every individual claimant been required to prove his or her entitlement on a

29 E.g. Report of the Review Committee on Insolvency Law and Practice (Cork Report,Cmnd. 8558, H.M.S.O., 1982) paras. 1076-1080; Barlow Clowes, where cost was one of thereasons why none of the parties argued for a North American Rolling Charge distribution:supra.n.l at 28b per Dillon L.J., at 35jper WoolfL.J.

30 Per WoolfL.J. supra.n.l at 35j (on the North American Rolling Charge). Pari passuwould also have been easiest to apply in Hobourn Aero supra.n.20 where like Barlow Clowesthe total investment and total fund remaining were both known.

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rolling charge basis. However, this problem is easily resolved by evidencepresumptions. If in the absence of contrary evidence, payments in and out areconsidered to be simultaneous, then there will be a pari passu result. Only ifthere is contrary evidence will this presumption be displaced, and the sensiblesolution would therefore seem to be simply to place the burden of proof on theparty claiming that the transactions occurred in a particular order.

The problem in Barlow Clowes is different, because in principle, it wouldhave been possible to apply either of the other two tests. It would, however,have been expensive, and indeed the cost might have been so great as seriouslyto dissipate what remained in the fund. This will not always be the case in thesilicon age, as Mr.Justice Parker observed in the Ontario case:

"The application of the general equitable rules of tracing refelTedto supra is both logical and fair. In this age of computerizedbanking, it can hardly be argued that in most instances anapplication of such principles will cause much inconvenience,difficulty or complication. These same principles are often appliedto quite complicated dealings which do not involve bankaccounts. "31

The general rules of tracing to which he was referring were, in effect, the NorthAmerican Rolling Charge. 32 This case is over a decade old, and it is reasonableto suppose that computerised banking has made the necessary calculationseasier in the meantime. However, it is accepted that there may still be somecases, such as Barlow Clowes, where the number of transactions is very large,where expense may still be a major issue.

It has already been suggested that on other grounds, pari passu distributionwas the most appropriate solution in Barlow Clowes, but if there had been nointention to form a common fund, it is felt that the expense arguments wouldnot have justified departure from the North American Rolling Charge. In thefirst place, there is the problem of deciding at what stage the departure shouldbe made, especially given that such departure might affect already-establishedrights. It is suggested, however, that there is no need to invoke a special rule to

31 51 O.R. (2d) 212 at 239-240, quoted in (1986) 55 O.R. (2d) 673 at 679h (Ont.C.A.).

32 Although the expression "North American Rolling Charge" is never actually used inthe case.

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deal with this situation. If the cost of applying a particular method ofdistribution becomes so great as to dissipate a large part of the fund, it is clearlyin the interests of all the parties to agree to some simpler form of settlement. Inprinciple, this is no different from any other kind of litigation over limitedfunds. If one party can still see a clear gain from the application of the NorthAmerican Rolling Charge, then it is for that party to bring the case, with theattendant litigation risks and costs.

There are, in any case, problems with basing a legal rule on the comparativecosts of distribution methods, since especially in the age of computerisedbanking, these comparative costs can alter. It would be absurd to set in stone aparticular distribution method, on the basis of comparative costs, when thesecould quickly go out of date. It is even possible to envisage situations where thedifficulty and/or expense increases or decreases during the proceedings,perhaps because a cheaper method is developed of getting data into electronicform, or the only witness of fact dies, or records are destroyed. It would beabsurd to alter the distribution method, thereby affecting established propertyrights. Once it is accepted that this cost is, in principle, no different from anyother litigation cost, then these problems disappear.

AUTHORITY

Argument has been made so far for the general adoption of the NorthAmerican Rolling Charge except in cases where it would be inappropriate, forexample, where the parties are contributing to a common fund. If theapplicability of Clayton's case is resolved in the House of Lords, as LordJustice Woolf suggested in Barlow Clowes, 33 then previous authority would notimpede the development of the law, but in the meantime it is necessary toexamine the authorities against the proposition for which argument is made.Despite Lord Justice Dillon's view in Barlow Clowes that there was clearauthority against the adoption of the North American Rolling Charge, 34 it issuggested that such authority as there is unconvincing.

There are a number of authorities for a pari passu method of distribution, butnone of these is conclusive against the North American Rolling Charge,because either individual tracing issues were not decided, or the result would

33 Supra.n.3.

34 Supra.n.9.

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have been the same even if the North American Rolling Charge method hadbeen used, or the case falls within one of the exceptions for which we havealready argued. In Sine/airv. Brougham, the House of Lords held that a fundconsisting a building society and ultra vires banking investments be held on apari passu basis, and there is no doubt that a North American Rolling Chargebasis of distribution would have led to a different result, except in the unlikelyevent that all investments were made simultaneously. However, it has alreadybeen suggested that at least for the building society shares, a pari passudistribution was probably justified as a common investment, and this may alsovindicate its use in the distribution of the ultra vires banking investments. Inany case, however, the House seemed concerned only to ascertain therespective distributions as between the two classes of investor, rather thandetermine individual entitlements, since the order was made subject to anyindividual tracing claim that may have been made. 35 Sinclair is therefore notauthority against the applicability in English law of the North AmericanRolling Charge.

There was also a pari passu distribution in Re Diplock, except for the runningbank accounts, but Diplock also is not a strong authority against the NorthAmerican Rolling Charge, because there was only one Diplock investment intoeach fund, and therefore the result would have been the same had the NorthAmerican Rolling Charge method been adopted; In Bar/ow Clowes, pari passuwas used, and the North American Rolling Charge method was considered toodifficult to apply, but the ratio of the case is probably confined to commoninvestment funds. 36 Certainly, Lord Justice Dillon would not have applied paripassu except to a common investment, but it is also worth observing that noneof the parties advanced a North American Rolling Charge argument. Thedebate was therefore confined to the relative merits of pari passu againstClayton's case, and the opportunity to consider serious arguments for the NorthAmerican Rolling Charge did not arise.37

It is contended that Clayton's case ought never to be applicable to theresolution of competing equitable property interests. Clayton's case itselfconcerned the allocation of legal choses in action to amounts of money in a

35 On this point alone the case was overruled in Westdeutsche supra.n. 7.

36 Supra.n.19.

37 Dillon L.J. also thought that the North American Rolling Charge was ruled out on thegrounds of authority, and in particular the cases discussed in the following paragraph: supra.n.9.

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bank account. The dispute was between banker and customer, and in thisparticular context, as a rule of convenience based on implied intention it wasprobably justified. McConville has argued strongly that there is no justificationfor applying Clayton's case beyond that context, 38 but in Pennell v. Deffell,39the principles from the case were extended to the distribution of competingproprietary claims to money in a bank account. The case is a weak authority,however, because as between beneficiaries and trustee the case was overruledin Re Hallett's Estate, 40 and as between the beneficiaries themselves there wasenough to go around anyway. In Re Diplock, Clayton's case was used, as partof the ratio, in respect of the Dr. Barnan:io and National Institute for the Deaffunds, but unenthusiastically, since the main purport of Re Diplock is to applypari passu where the equities are equal. 41 Clayton 's case was applied only torunning bank accounts, as a rule of convenience, and was said to be based onimplied intention, which of course is rebuttable. It is also unlikely that anybodyhad even thought of the concept of the North American Rolling Charge by thetime of the decision, let alone of applying it. It is argued, therefore, that theauthority is not strong, but it was used by Lord Justice Dillon in Barlow Clowesas Court of Appeal authority for the rejection of the North American RollingCharge. It is difficult, however, to justify Clayton's case on the basis of impliedintention in Re Diplock, since the next-of-kin and the charity had never had anycontact with each other; indeed, the charity was unaware of the existence of thenext-of-kin. Clearly, therefore, there was no common intention, and since thenext-of-kin was unaware of the destination of the money, their intention cannothave been relevant. The only intention therefore which can be relevant is that ofthe charity, the volunteer who does the mixing, and it is suggested that to founda principle on the basis of the intention of the volunteer recipient is absurd.

It can be concluded that there is no convincing authority against thedevelopment of the North American Rolling Charge, but that in so far that it isruled out by any statements made in Re Diplock, those statements should beregarded as wrong. In Bar/ow Clowes, only Lord Justice Dillon perceived thatthe North American Rolling Charge had been ruled out by authority; Lord

38 D.A. McConville, "Tracing and the Rule in Clayton's Case" (1963) 79 L.Q.R. 388.

39 (1853) 4 De G.M. & G. 372,43 E.R. 551.

40 Supra.n.5.

41 Supra. n. 7 & text, & n.17 & text.

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Justices Woolf and Leggatt would both have been prepared to apply it had theyconsidered it appropriate in the circumstances.

It is suggested, therefore, that even in the absence of a decision of the Houseof Lords reconsidering Clayton's case, the courts could adopt the principleswhich have been argued for in this article.

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